How the Dividends are Accounted for in Spread Betting

Q.76: Great website, but as a side note though, what about the dividends you will go without? If a company awards shares over cash, does your position increase? My guess is that it won't (but I'm not 100%) And what happens if a stock splits? Is this reflected in your position?

A: Dividends - The morning after a share goes ex-div the price of the share will drop approximately by the amount of the dividend. Dividend adjustments are credited to long positions and debited from short positions held at the close of business on the day before the ex-dividend date. If you are long, you will receive 80% to 90% (depending on the spread betting company) of the dividend and if you are short, you will be debited 100% of the dividend. You will see in the annual interest column that sometimes it is less than 4.75%. This is the effect of the dividend to be paid - the quotes are lowered to reflect this. Some deals show negative interest - this is where the dividend due outweighs the interest charge. More information on how Dividends are covered is available here

Stock splits are dealt with fairly too. In the event of a stock split the bets will be closed and opened again at a new price and stake which will take account of the stock split. You will not profit or lose as a result of the stock split. For instance, if Elan announced a 2:1 stock split and you had a £10 buy position at 2000 this position would be closed and a new spread bet would be opened for a £20 buy position at 1000.

Q.77: I just wondered if you could confirm my understanding of spreadbets and dividends is correct. As far as I can tell you get no benefit of dividends in a spreadbet. The expected dividend seems to be excluded from the quoted price altogether, and so presumably does not drop when the share goes ex-div either. Have I understood this right?

A: Nope. I think it's fair to say without question spreadbets always include dividends (otherwise short positions would do extremely well).

Some don't always give you 90% of the dividend (after 10% tax rate) though.

To understand more it's worth noting the following:

Basically there are two types of spreadbet.

1. Daily Cash spread bet - automatically rolls over daily and will include adjustments as they happen (i.e. on ex-dividend day the price will be adjusted).

2. Quarterly Spreadbet - Spreadbet is priced to a certain date meaning that if there are any dividends (date of ex-dividend) occuring before the expiry then the price will account for that.

Effectively spreadbets are quoted ex-dividend (for any dividends due within the period for which the spread bet runs*), irrespective of whether the underlying stock is ex-dividend or not.

(* Therefore in the case of intra-day spreadbets the SB is cum-dividend until the x-dividend date of the share - as the share does not become x-dividend intra-day - the price of any rolled over daily bets is adjusted to account for the dividend overnight on the Eve of X-Dividend day).

So for example if a share price is £1.10 cum - dividend with a dividend of 10p. The spreadbet price would be £1.00 (plus any financing cost).

Once the share goes ex-dividend the share price (all else being equal) will fall by 10p to £1.00, the spreadbet price will not change.

So as a spreadbetter you do get the benefit of the dividend but you get it at the time of purchase (buying for £1.00 rather that £1.10) rather than by an actual transfer of cash to you once you hold the share.

(Things can though get a little more complex in the case of special dividends etc...)

This means that the dividend is reflected in adjustments to the opening price (on daily and quarterly bets). The only problem I've come up against is where a dividend changes or isn't known about when the current quarterly contract is set i.e. what happens if VOD suddenly declared they would return 10p to shareholders before the current June expiry - it actually might happen as well!

Two other situations sometimes arise:

1. In smaller companies, I sometimes find that the price quoted by the spread betting company doesn't reflect the details of a previously declared dividend; I normally either ask about this when I place the bet or when the share goes ex-div and I find the price quoted by the spread betting company has changed unexpectedly by the size of the dividend.

2. It is known that the share is almost certain to go ex-div, perhaps twice for bets expiring up to 9 months in the future, during the duration of the bet, but the exact details of the dividends can only be guest mated as they are yet to be formally declared.

Both the above situations can require adjustments to entry prices to correctly reflect the actual size of the dividends. My experience with spread betting a company is that they have always dealt with both these situations fairly rather than seeking to profit from them.

Q.78: Opened at 174 at 15 a point. Cash price at 200. So why isn't my gain showing as (200 - 174) x 15??

I opened a 15 point Sept long position on Bradford & Bingley at 174. However now I'm seeing the cash price of the security at 200 at my broker. So how it that my gain is only showing as GBP135.60 instead of GBP390 [i.e. (200 - 174) x 15 points]!? Price to sell is showing at 184.5.

A: This is what we have been discussing above. When you originally placed the spread bet you bought it at a discounted rate to what it was trading in the underlying market. The September spread bet price is discounted to reflect the dividends payments which are due to be paid out within the lifetime of the bet. On 19th March 14.3p is due to be paid out as dividends for Bradford & Bingley and on August 20th another 6.7p per share is due to be paid out.

As you don't receive these dividends for quarterly spread bets your spread betting provider has reduced the price by this combined amount – this is the reason that their price is currently lower than the cash price.

Since you opened the bet the shares has gone up approximately 10p

Q.78.1: I called to ask 'IG work out their FTSE price differently than us'...40 points difference???!!

A: If you were watching IG then you were watching the 'Cash' price with an expiry for Wednesday's close of business which would obviously have the dividend deducted since 'Daily Cash Wednesday' has finance and xd (xd = X Dividend) discounted in the current price.

You were comparing this with a 'Rolling Cash' product which, depending on which platform you use, gets 'Rolled' at a specific time. For instance Capital Spreads 'roll' their markets after the close. This means that Wednesday's xd wouldn't get deducted until the market shut at 9pm Tuesday evening at which point, if you were short, you would get 31 x stake deduced from your account which you would effectively get back once the FTSE gapped lower the next morning. Likewise, if you were long, you would get the dividend paid into your account (although I believe Capital only pay 80% of dividends) - You would of course suffer the 31 point drop on your position when the market reopened.

So the answer to your question is one of 'determination date'. Always be aware of this on a Tuesday evening since FTSE goes ex dividend on Wednesday morning at the open.

Q.78.2: What happens with spread bets when a rights issues occurs?

A: Quite straightforward really but taking your example into perspective:

Pre Rights Issue: 3 shares @ 370p = 1110p
Post Rights: 4 shares = 1110p + 300p
Therefore 1 share = 1410/4 = 352.5
Adjustment by spreadbetter would be 17.5p

Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)

Comments	Date

Name:
Email:
Comments :

Please do not copy/paste this content without permission. If you want to use any of it on your website contact us via email at  traderATfinancial-spread-betting.com (remove the AT and substitute by @).